We are sure that the recent (and continuing) financial markets turmoil is creating new and challenging issues for firms on an almost daily basis. We have heard from many of our clients over the last weeks about a number of separate issues related to market events. We thought it might be helpful to try to summarize some of the issues we have been discussing and thinking through by sharing with you an "issues list" for broker-dealer legal, compliance and operational personnel to consider in light of the turmoil in the financial markets.
- Consider reviewing existing procedures and checklists for replacements to determine whether they should be revised or updated in light of the possibility for aggressive exchanges from financially troubled insurers or holding companies. In addition, firms should consider the need to provide education and training to their field force about (1) the impermissibility of providing inaccurate information about the financial status of an issuing insurer and (2) the level of regulatory scrutiny being placed on certain exchange transactions.
Marketing and Disclosures
- Consider whether the firm’s website or other “generic” customer materials provide general discussions of the securities markets and particular types of investments or asset classes that may need to be revised to reflect recent questions regarding the relative safety and liquidity of various investments.
- Note that talking points or investor alerts about Treasury guarantees of money market fund investments must be accurate and not misleading. Key factors to consider are the following: the guarantee program is available only to those money market funds that elect to participate; and, in that case, the guarantee is available only to those investors who were shareholders on September 19, 2008, and only to the extent of shares held on that day. For more information, please click here.
Auction Rate Securities
- If the firm sold auction rate securities (ARS) and is not yet responding to FINRA exam requests, consider the due diligence and training undertaken by the firm before the products were sold as well as disclosures made to customers. If the firm is considering buying back ARS from customers, the firm should consider whether the buyback is in compliance with SEC and FINRA offering, customer communication and net capital rules.
- Consider whether the firm’s net capital policies and procedures need to be updated in response to recent developments. Firms should review their investment accounts and where those investments are maintained (e.g., at what clearing firm). If a firm has been asked to contribute capital to its parent, a firm should consider whether it has complied with SEC rules that apply to withdrawals of equity capital. Also, if a broker-dealer accepts accounts transferred from another firm, the accepting firm should consider whether it is set up to service those accounts in the same manner as the prior firm.
- Consider whether the firm’s written procedures need to be updated to show compliance with the numerous emergency and other orders published by the SEC in the last several weeks, and whether they are effective in preventing potentially illegal trades.
- Consider reviewing clients’ investment objectives to ensure that securities in client accounts are consistent with investment objectives, particularly for those clients that have (1) short-term investment objectives or (2) expressed a desire to have a percentage of their accounts in liquid assets; for such clients, consider whether their investments provide sufficient liquidity.
- Consider reviewing clients’ money market investments and determine whether they continue to be suitable for clients and provide sufficient liquidity; if a firm wants to change the sweep options it is offering, it must comply with applicable FINRA affirmative consent requirements.
Change in Control
Note that any potential capital infusion, buyouts, partnerships or other equity stakeout investments in a parent company (or the firm itself) may trigger a “Rule 1017” filing with FINRA. Note also that ownership information on Form BD may need to be updated.
Other Issues to Keep in Mind
- Complaint Reporting. Firms should anticipate and prepare for an increase in customer complaints. In this regard, firms should review their customer complaint reporting procedures to make sure that they are current. Also, particular attention should be paid to keeping senior management advised of trends and underlying themes with respect to complaints.
- Regulatory Developments. Firms need to keep in mind that current regulatory initiatives are proceeding. Firms should track new compliance obligations that will be established under FINRA's Rule Consolidation Project as well as other ongoing initiatives.
- FTC Red Flag Rule. Related to the above, firms should be mindful of the FTC’s Red Flag Initiative. This rule has a compliance date of November 1, 2008, and will require the development, implementation and maintenance of an identity theft program by covered companies.
- Annual Review. As firms begin to think about their annual compliance and supervisory reviews, the issues discussed in this alert should be considered with a view to possible inclusion as review topics.